Forfeiture for non-payment of rent will not follow normal procedures if a company voluntary arrangement is introduced into the equation
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● A landlord can accept rent payments only in accordance with any appropriation made by the tenant and cannot forfeit for non payment of rent covered by a CVA |
The non-payment of rent is often an early indicator that a tenant is in financial difficulties. Understandably, individual creditors, including landlords, are primarily concerned with recovering what is owed to them. However, modern insolvency regimes are designed to try to rescue businesses and this can produce potential conflicts with other debt recovery mechanisms.
A recent Court of Appeal decision – Thomas v Ken Thomas Ltd [2006] EWCA Civ 1504; [2007] 01 EG 94 (see p94) – examines the relationship between the appropriation of payments, waiver, insolvency and forfeiture for non-payment of rent.
Problem in Thomas
The respondent landlord had, in 2004, let a substantial warehouse to the appellant tenant – a haulage company -for a term of 10 years at a rent of £400,000 pa, payable monthly. The tenant paid its basic rent between April and October but did not, as required, pay VAT on those sums. It then got into financial difficulties and failed to pay the November rent. In early December, its financial advisers wrote to the landlord (and other creditors) and confirmed that a company voluntary arrangement (CVA) was being proposed.
This letter informed the landlord that the tenant would make two payments in December to cover that month’s rent (including VAT) and that the rent owing for November and the amount outstanding for the VAT would go into the CVA. The landlord did not agree with this allocation of payments. He sent a rent demand for December and stated that he would accept the proposed payments only as the rent for November. The tenant’s advisers stuck to their position and the payments proposed were made by bank transfer.
The landlord sent a further demand for the January rent. The tenant proposed that it should pay the rent on a weekly basis and this was implemented. By March 2005, despite the landlord’s opposition, the CVA was approved. Meanwhile, in February, the landlord had commenced forfeiture proceedings for the non-payment of one month’s rent and for the non-payment of amounts to cover VAT between April and October. At trial, the judge decided that the landlord was entitled to forfeit and that the tenant should be granted relief only if it paid all the sums claimed, including those for the VAT.
The tenant appealed on three main grounds. First, it argued that the landlord had waived his right to forfeit by accepting the rent. Alternatively, it contended that he had lost the right to forfeit on account of the CVA. The final argument was that even if the landlord was entitled to forfeit, the terms of relief should not have required the payment of the VAT.
The tenant contended that by failing to return the rent payments made in December and January, the landlord had waived his right to forfeit in respect of the non-payment of November’s rent. As the Court of Appeal made clear, this proposition was based on well-established law and was incontrovertible. However, the real issue was whether the payments made by the tenant were for the December and January rent or, as argued by the landlord, for the November and December rent. This turned on the law governing the appropriation of payments made by a debtor.
Appropriation point
Having examined the law on appropriation, Neuberger LJ was satisfied that this allows a debtor to appropriate payments to a specific debt; only if it does not exercise that right is the creditor entitled to do so.
In the present case, the tenant had appropriated the payments made in December and January to the December and January rent. Although the landlord had made it clear that he was not happy with that appropriation, he had no right to change it. All he could do was to not accept payment or, given that the payments were made by bank transfer, he could have returned the money. Since he had not done this, he had necessarily waived his right to forfeit. Although this ruling rendered the other issues redundant, Neuberger LJ went on to consider them.
The Court of Appeal was of the view that once a CVA is in place, rent falling due thereafter should not fall within the CVA: “Normally it would seem wrong in principle that a tenant should be able to trade under a CVA for the benefit of its past creditors at the present and future expense of its landlord… he should… expect to pay the full rent… .” In the present case, the rent owed was for a period (November) before the CVA had been proposed. That sum fell within the CVA and the landlord had therefore lost his right to sue for it. However, the landlord argued that this did not mean that he had lost his right to forfeit since this was a proprietary right.
Right waived
Neuberger LJ acknowledged that two decisions supported the landlord’s argument. However, he concluded that these views were incorrect. A CVA is concerned with obligations rather than remedies. The idea that a landlord can forfeit for a debt within a CVA is inconsistent with the rescue culture embodied in the current insolvency regime.
A CVA replaces a landlord’s right to recover the rent with its rights under the CVA. Therefore, just as the landlord’s right to sue in Thomas for the rent had been lost, so had his right to forfeit. The CVA regime makes it clear that secured and certain preferential creditors are not bound; since it is now clear that landlords with a right to forfeit are not secured creditors, this reinforces the view that they are to be bound by the CVA. The judge thus concluded that a landlord cannot forfeit for non-payment of rent covered by a CVA, pointing out that a landlord in this situation would normally remain free to forfeit on account of the CVA.
His lordship finished by dealing with the issue of whether, had the landlord been able to forfeit, the court would have been able to require, as a condition of relief, the payment of the VAT amounts owing for April to October. The tenant argued that this was inappropriate because the landlord had waived his right to forfeit for these amounts by accepting rent (whether for November or December). Neuberger LJ agreed: “the accident of the landlord being able to forfeit for non-payment of [a] later sum should not enable him… to extract [an] earlier sum… where he has in fact lost the right to [forfeit]” in respect of that earlier sum.
Sandi Murdoch, honorary fellow, Reading University
